Types of Stablecoin
Fiat-backed stablecoins hold cash and short-term government debt as reserves; crypto-collateralised stablecoins are backed by more crypto than they issue; algorithmic stablecoins rely mainly on incentives and supply adjustments. A depeg is when a stablecoin trades materially away from its target, such as $1.
All stablecoins promise a steady price, usually $1. How they keep that promise differs, and so does what happens when the promise is tested. Knowing which type you hold tells you what stands behind it — a bank account, a pile of crypto or just an algorithm — and how it might fail.
- Category
- Cryptocurrency and Blockchain
- Reading time
- 4 min
- Also called
- Fiat-backed stablecoin, Crypto-collateralised stablecoin, Algorithmic stablecoin
- Updated
Stablecoin types in plain words
Fiat-backed stablecoins can be bought one-for-one with a regular currency and redeemed with the issuer for that currency.1
Crypto-backed stablecoins are overcollateralised: a $1 coin may have at least $2 of crypto behind it.1 Algorithmic stablecoins aren’t backed by other assets; an algorithm adjusts supply instead.1
Even reserve-backed coins can depeg: in March 2023, USDC de-pegged significantly after its issuer could not access part of its reserves at Silicon Valley Bank.2 See Stablecoin.
How to assess a stablecoin, step by step
Identify the type
Fiat-backed, crypto-backed or algorithmic.
Check redemption
Fiat-backed coins are redeemed with the issuer for the underlying currency.1
Check collateral
For crypto-backed coins, check how much collateral backs each coin.1
Check reserve location
Reserves at a failing bank can trigger a depeg, as with USDC in March 2023.2
Understand the algorithm
Algorithmic coins rely on supply changes, not assets.1
Watch the price
A move materially away from $1 is a depeg; check Liquidity before you need to exit.
Worked examples
Example 1 — Overcollateralisation
$2,000 collateralYou want to mint 1,000 crypto-backed stablecoins at a required ratio of 200%.
| Collateral needed | 1,000 × $1 × 200% = $2,000 of ETH |
| If ETH falls 30% | $2,000 × 0.70 = $1,400 (140%) |
Crypto-backed coins hold more collateral than they issue because the collateral is volatile.1
Example 2 — A depeg trade
−$400 if soldA fiat-backed coin briefly trades at a hypothetical $0.92. You hold 5,000 coins.
| Market value | 5,000 × $0.92 = $4,600 |
| Paper loss | $5,000 − $4,600 = $400 |
USDC de-pegged significantly in March 2023 when part of its reserves were stuck at a failed bank.2
Example 3 — Algorithmic supply change
Your share stays, coin count changesAn algorithmic coin trades at $0.98. The algorithm reduces supply by 2%.
| Your coins before | 10,000 |
| After supply change | 10,000 × 0.98 = 9,800 |
Algorithmic coins adjust supply rather than holding backing assets.1
Comparing stablecoin types
| Aspect | Fiat- or crypto-backed | Algorithmic |
|---|---|---|
| What backs it | Cash and debt, or extra crypto | Mainly incentives and supply rules |
| Main risk | Reserve or collateral problems | Loss of confidence in the mechanism |
| Redemption | Issuer or protocol | Usually via the protocol |
| Trust in | Issuer or smart contracts | The algorithm and demand |
Why the type matters
Parking trading capital
Choose a coin whose backing you understand.
DeFi collateral
Stablecoins are increasingly important in DeFi markets.
Trading pairs
Quote currency for crypto pairs.
Risk management
Spread holdings across issuers.
Advantages and disadvantages
Advantages
- Fiat-backed: simple 1:1 redemption.
- Crypto-backed: transparent on-chain collateral.
- Algorithmic: no reserves needed.
- All: stable unit for trading and DeFi.
Disadvantages
- Fiat-backed: depends on the issuer and banks.
- Crypto-backed: collateral can crash.
- Algorithmic: can fail if confidence breaks.
- All: can depeg.
Going deeper
Read as far as you need. Each level builds on the one before it.
Three designs
Beginner
Depegs happen
Intermediate
Even a large reserve-backed coin can depeg, as USDC did in March 2023.2 Watch Liquidity and Counterparty Risk.
A DeFi building block
Advanced
Stablecoins are increasingly important in DeFi and crypto markets, so a depeg can spread through lending pools and trigger liquidations.2 Rules on issuers differ by country.
Common mistakes
Treating all stablecoins as cash
Ignoring how each is backed.
Ignoring the issuer
Not checking who holds the reserves.
Holding one coin only
Concentrating stablecoin risk.
Trusting high yields on algorithmic coins
High yields may signal fragility.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Fiat-backed coins hold cash-like reserves.
- Crypto-backed coins hold more crypto than they issue.
- Algorithmic coins rely on supply rules.
- Any type can depeg.
- Know what backs a coin before holding it.
Frequently asked questions
Is a stablecoin the same as a bank deposit?
What causes a depeg?
Are stablecoins regulated?
Further learning
- Stablecoin
The basics of stablecoins.
- Treasury Bills, Notes and Bonds
What many reserves hold.
- Counterparty Risk
Issuer and bank risk.
- Liquidation
How depegs spread through DeFi.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- ethereum.org. Stablecoins (opens in a new tab) Checked .
- Federal Reserve Board (FEDS Notes). Primary and Secondary Markets for Stablecoins (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.